The John Weld Peck Federal Building, shown Tuesday, May 14, 2013, in Cincinnati, houses the main offices for the Internal Revenue Service in the city. / AP Photo/Al Behrman

Written by

Gregory Korte

USA TODAY

WASHINGTON — The first time Internal Revenue Service agent Gary Muthert took notice of the Tea Party was when he saw a story about anti-tax protests on CNN, and another agent mentioned he had seen an application for tax-exempt status from a Tea Party group.

"We would review CNN just to see what the news of the day was," Muthert — a Cincinnati-based agent — told congressional investigators in a transcribed interview. "The Tea Party was in D.C. protesting, and that was like, OK, that's unusual to have one of these cases in here."

A local supervisor mentioned the Tea Party case to IRS officials in Washington, and the conversations soon snowballed into what became a systemic practice of targeting the tax-exemption applications of Tea Party groups for additional scrutiny, the transcripts and government documents show. Congress and the FBI are now investigating who ordered that targeting and whether any laws were broken.

E-mails and transcripts reviewed by USA TODAY give one of the most complete accounts to date of how the targeting began in early 2010. The records show that it was low-level employees in Cincinnati -- where all tax-exempt applications are processed --who first flagged Tea Party cases for review, but they engaged their managers in Washington early on.

House Oversight and Government Reform Committee Chairman Darrell Issa, R-Calif., has said the transcripts show that the scandal involves more than "two rogue agents in Cincinnati" and that low-level IRS employees "were directly being ordered from Washington." But the top Democrat on the committee, Rep. Elijah Cummings, of Maryland, noted that "none of the five IRS officials who have appeared before the committee has identified any White House involvement."

The Tea Party affair started with a Feb. 25, 2010 e-mail from Cincinnati-based IRS agent Jack Koester to his boss, Screening Group Manager John Shafer. Shafer, in turn, sent it to his superiors, including some Washington staff, elevating it as a "high profile case."

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The Cincinnati employees weren't quite sure what the Tea Party was, but they knew it was politically sensitive. "This case will be sent to inventory for further development. Political campaigns on behalf (of) or in opposition to any political candidate do not promote social welfare," Shafer wrote to his bosses. The Tea Party groups were seeking tax exempt status as "social welfare" groups.

A few days later, Shafer came back to Muthert asking him to look up how many Tea Party cases had been received, and how many had already been approved. "He told me that Washington, D.C wanted some cases," Muthert said, according tot he transcripts.

Shafer, though, told congressional investigators that he asked for the list on his own -- not on orders from Washington. "No one said to make a search," he said.

"Based on what I saw at the time, this organization is something — I don't know what it is, but it is something that appears to be growing, some type of movement," Muthert said. "So when I was asked to research the Tea Parties, it was like OK, I understand why you would want me to look at these cases and see if there is going to be a million coming in or not."

Muthert began flagging the Tea Party cases as an "emerging issue," meaning that the cases might raise new legal issues that should be looked at by tax law specialists. In effect, that meant that the Tea Party cases were put in a "holding pattern," Muthert said.

Elizabeth Hofacre, the Cincinnati coordinator for emerging issues, put it another way: "These cases were basically in a black hole," she told internal IRS reviewers in 2012.

Hofacre, who had been working on tax-exempt determinations in Cincinnati for 11 years, said the way the IRS handled Tea Party cases was unprecedented. She said she was "micromanaged to death" by an IRS lawyer who worked in Washington. Every piece of correspondence had to be reviewed by Washington. She was asked to fax entire case files to Washington. "I thought it was ridiculous. I mean, I don't understand why they didn't just take the files up (to Washington)," she told the Oversight Committee staffers.

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Tea Party groups started to complain, but she was powerless to move the cases, she said.

"It was like working in lost luggage. You are getting it from everywhere. Irate taxpayers. It wasn't a good place to be," Hofacre said. She soon asked for a transfer. "This is a really sensitive issue, and I was just concerned to be associated with it because it was a particular political movement," she said.

In July 2010, the IRS developed what was called a BOLO list — for "be on the lookout." It instructed agents to send Hofacre applications from "organizations involved with the Tea Party movement." Investigators have not yet established who created or authorized that list; such lists did not exist before 2010.

She told congressional investigators that she understood the purpose of the list was to target conservative and Republican groups. "A lot of the platforms in the Tea Party are similar to that of Republican groups." she said.

Other political groups did not get handled the same way, Hofacre said. "I did see some with progressive issues. And I sent them back to the specialist and said they needed to develop the case," she said. "I was tasked to do Tea Parties, and I wasn't — I wasn't equipped or set up to do anything else."

That meant that other political groups were approved routinely. A USA TODAY review of tax exemptions granted at the time shows dozens of liberal groups got tax exemptions while Tea Party groups were on hold.

A year later, Exempt Organizations Director Lois Lerner asked for clarification on the criteria being used to identify Tea Party cases. Lerner — the IRS official in Washington responsible for all exempt organizations — has refused to answer questions before the oversight committee, citing her Fifth Amendment right against self-incrimination.

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"What criteria are being used to label a case a 'Tea Party case'?" wrote Holly Paz, director of Rulings and Agreements, in a June 2, 2011 e-mail. "We want to think about whether those criteria are resulting in over-inclusion. Lois wants a briefing on these cases."

As a result, Shafer came up with another set of BOLO criteria that IRS officials later admitted were just as problematic. They included groups whose "issues include government spending, government debt and taxes" and groups "critical of how the country is being run."

Shafer denied any political animus in those criteria. A self-described "conservative Republican," he told oversight committee staffers last week that he had no reason to believe the White House was involved in the targeting. "I do not believe that the screening of these cases had anything to do (with it) other than consistency and identifying issues that needed to have further development," he said.

The House oversight committee has now interviewed at least five lower-level IRS employees, and are working their way up to officials in Washington. The 360 pages of transcripts reviewed by USA TODAY do not answer why higher-ups at the IRS allowed Tea Party cases to sit in limbo for 27 months, until members of Congress started asking questions in 2012.